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GCN Home > November 20, 2000 issue

FEDERAL CONTRACT LAW

Remember, this change proposal shares the savings

Performance-based contracts, incentives and other types of so-called win-win arrangements between buyer and seller are becoming increasingly popular in federal contracting. When you get past the hoopla, however, you’ll discover these innovations aren’t really new.

For about 40 years, contractors have been invited to propose changes to the specifications and to share in the resulting savings. This value engineering technique is common in contracts but also commonly forgotten.

That’s a shame. The outlines of a value engineering program describe a mutually beneficial deal. The contractor proposes a different way to do the work, with the objective of saving the government money. The clause calls this a value engineering change proposal, or VECP. If the government accepts the idea, the contractor is paid a percentage of the savings.

The need for an incentive is obvious. Otherwise, why would the contractor take the time and effort to propose something that would reduce the contract price?

The government has complete discretion about whether to accept a VECP. What the government can’t do, however, is reject the VECP and then use the idea anyway. This is called constructive acceptance, and it entitles the contractor to a share in savings.

The contractor’s share depends on the type of contract. In most fixed-price contracts, the percentage is 50 percent of the savings. The savings eligible for sharing include those on the contract under which the VECP is accepted, other concurrent contracts and future contracts for a three- year period. The contractor can also receive 20 percent of the savings on collateral items, such as government operations and maintenance costs, up to a ceiling of $100,000.

The essential requirement is having a contract with a VECP clause in it. Without that, a would-be contractor’s suggestions are likely to be merely gratuitous.

Flex appeal

A recent decision by the Armed Services Board of Contract Appeals illustrates how flexible this program can be. In a case involving Sentara Health System [51540, Sept. 29, 2000], the contractor operated a network of primary care clinics. The government needed to report information on patient visits to a central computer database. It asked the contractor to propose a price for implementing its, the government’s, home-grown system. This depended on doctors filling out bubble sheets, which were then scanned and proofread.



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